Argentina: Not An Effective Capital Control, Import Control, Or Tax Measure – But An Effective People Control

Sometimes I have to hand it to the Argentine government – their systematic clampdown on the movement of goods and capital across their borders is creeping along just enough to make international headlines about once a week without incurring any real domestic outcry to speak of. Remember how Argentines were taking shopping vacations to hot spots like Miami to stock up on clothing, electronics, and other savvy purchases using their Argentine credit cards to get the official 4.5 ARS/USD rate? Well as of early September, that loophole has been sewn shut using fines, reporting measures, and penalties.

New requirements that every single purchase be reported to AFIP – before only purchases of more than 3000 pesos (roughly $650 at the official rate) were subject to reporting requirements

Banks must report every credit card purchase made by customers domestically and abroad to AFIP

Failure to report customs declarations will result in steep fines and criminal charges

Cardholders will be reimbursed the 15% each May if their taxes demonstrate they paid more than they owed the previous year. If this actually comes to pass, I will eat my shoes.

The question is, where do these new restrictions fall on the spectrum of controls?

Clearly they are not purely a forex or capital control to combat capital flight and the pressure on the peso. For a quick refresher see my post on multiple exchange rates. At present, the official exchange rate is 4.66 ARS/USD while the black rate is about 6.4 ARS/USD, over 37% higher. The new 15% tax doesn’t even split the difference, and taken alone Argentines would still be well-served to stock up on Mac chargers and MAC lipstick while abroad. Furthermore, is it capital flight if the goods purchased abroad are promptly brought back into Argentina? Pressure on the peso yes, capital flight not really.

The real kicker is the double ended reporting requirement – individuals must fully declare every purchase to AFIP, who can then compare and contrast with the credit card statements reported by banks. One reason people refrain from declaring purchases is that in protected industries including electronics, goods are subject to a substantial additional tax when crossing the border. More importantly than evading this border tax, Argentines evade income tax by reporting they make below a $20,000 annual threshold and using cash off the books for income and purchases above this level. The ability to peer into international and domestic credit card purchases and compare with tax filings is more significant than a 15% tax.

As an economist and an American, I value efficiency in all things. These new regulations use the comparison of two reports (individual custom declarations and bank reported statements) to identify tax evaders, rather than step up the AFIP airport presence and search more bags. But I think that’s what we’ll see within the next few months because it will clamp down harder and have a stronger psychological effect.

This new measure is inefficient, messy, and does little else well than inspire fear. AFIP chief Ricardo Echegaray explained the new regulations as a measure that would only affect the very wealthy when traveling, force that taxes are paid by those “who are able to pay more”, and stated that the government would prefer that Argentines stay and spend their summer vacations in the country. What is the policy goal there again, che?

Firstly, to prevent Argentines from one of the last legal means of accessing the official exchange rate is tantamount to admission that the rate is at least 15% overvalued. They might as well have slapped the full 37% on there and be done with it.

Secondly and more importantly, the declaration’s requirements and ability to match customs declarations with credit card statements appears to be geared towards catching tax evaders rather than stopping tax evasion. Yes, higher wealth individuals likely have more taxes to evade and have more opportunities to go abroad. But the percentage of tax evasion that goes towards overseas purchases of Ipads pales in the face of government corruption in the nation. In 2010 the Guardian ranked Argentina 105 of 178 countries, and that was before the capital controls and restrictions set in.

The bottom line? This is not really an effective capital control, import control, or tax measure – it is a people control. So far the government has targeted money leaving the country and goods coming in, but this crosses the line in specifically targeting and indeed vilifying Argentines who travel and spend money overseas that may not have flawless income tax records.

These new measures will soften the blow on the dollars spent abroad by lessening the volume of transactions and recovering 15% on each dollar spent abroad. But the regulatory cost to the government of tracking all purchases and matching them with customs declarations is high. This is a demonstration of power that will be followed by more obvious inspections and stricter movement restrictions.

I’d bet next time I enter Argentina I will have more than this old machine to worry about. Cross posted from NotParis.

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3 comments for “Argentina: Not An Effective Capital Control, Import Control, Or Tax Measure – But An Effective People Control”

Sancho

September 18, 2012 at 3:36 am

That is why you should be worried when taxation goes north of 35-40%. You get to a state where no small business or independent professional can subsist paying absolutely all the dues. So every citizen in the nation is the target for legal prosecution. You fail to report that AFIP has been used to prosecute people that dared to say something slightly critical to government…

Petunia

September 21, 2012 at 10:16 pm

Argentina does not have the processing power necessary to track this activity. I would not worry too much about their ability to tax foreign purchases. The credit card companies will help their customers get around this restriction anyway, by giving them credit cards issued outside the country.

Joseph

September 28, 2012 at 5:33 pm

Taxation is supposed to be for the support of government. Not to bail out the banksters and to allow the government to engage in wealth redistribution. Doing that is just theft, pure and simple.